Yahoo Finance Property: The bank of mum and dad mortgages
With mortgage rates increasing following the mini-budget and 2022’s house-price-to-earnings ratio now at seven, parents are looking at new and innovative ways they can utilise their own income and savings to help their kids onto the property ladder.
As well as through loaning or gifting deposits, there’s been an increase in parents being named on their children’s mortgages.
We investigate the phenomenon of the "boost mortgage" and speak to the experts about the pros and cons.
Increase in family mortgages
Whether it’s using a parent’s income to boost the amount you can borrow, utilising parents’ savings to offset your monthly repayments or naming parents as a guarantors on a mortgage, there are several ways that family members can help younger generations buy a home.
“These schemes have been on the market for some time now but, due to the tightening of mortgage market conditions we have seen over the last year, they have been offered and marketed more widely by lenders,” says Felicity Holloway, head of mortgages at Moneybox.
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“We saw a significant increase (48%) in first-time buyers looking for support with boost mortgages in 2022 versus the previous year,” says Polly Gilbert at Tembo.
“Clearly the need for family support for first-time buyers is increasing as rents continue to rise, salaries stay flat and house prices remain out of reach for most.”
So, what are the different mortgages that cater for families helping their children?
Joint borrower sole proprietor mortgage
With a joint borrower sole proprietor (JBSP) mortgage, the income of a family member, or even a friend, can be used on the mortgage application. This boosts the amount a buyer can afford but it is only their name on the deeds of the property.
The advantage of this mortgage is that the assister can increase affordability but there is no additional stamp duty to pay as they do not own the property.
“Lenders offering JBSP mortgages offer this option across their product range so there is plenty of choice and you don’t pay a premium on the rate,” says Mark Harris of SPF Private Clients.
This is a temporary form of support, with the idea being that once the mortgage becomes affordable, the assister can be removed from the arrangement.
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Inevitably, there are some disadvantages too. While the parent or assister doesn’t need to contribute to the monthly payments, they would be expected to step in if the buyer wasn’t able to afford them.
“As the guarantor and the buyer/s are financially linked, if either party experiences financial difficulties that lead to credit issues, that would impact the other’s creditworthiness, too,” says Gilbert.
Many JBSMs also have an age weighting so, if one of the applicants is over 60, the monthly repayments would become more expensive, or the term made shorter.
“Usually, the parent or family member is quite a bit older than the child looking to buy and this may impact how long the borrowing can be taken over, which in turn can increase the monthly payment amount,” says Holloway.
“There is also no legal provision for the joint borrower to benefit from any price increase of the property when it comes to be sold.”
Guarantor mortgages
Guarantor mortgages have largely been replaced by JBSP mortgages in recent years which are typically “seen as the ‘next generation’ guarantor product,” according to Gilbert.
“Those that are available typically use ‘savings as security’, so a parent locks away a deposit contribution into an account with the lender. The funds [usually 10-20% of the loan size] are held in a savings account with the lender for a period of time, typically three to five years.”
This type of mortgage has the big advantage that it allows a buyer to borrow up to 100% of a property’s value while the guarantor can still receive interest on their savings.
However, during the period that the savings are locked away, the guarantor doesn’t have access to them, and this money is in danger if the buyer defaults on their mortgage.
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“There is a real risk to the family dynamic if things go wrong,” says Gary Hemming, money expert at ABC Finance, plus, “interest rates may be higher than traditional mortgages.”
Offset mortgages
In a similar way to a traditional offset mortgage, these mortgages involve parents using their savings as a way of reducing the amount of interest their child pays on their mortgage.
Unlike a guarantor mortgage, savings can be added to or removed from an account as and when they are needed. This makes things more flexible and reduces any potential friction within the family.
The downside of this set-up is that there is a limited number of offset mortgages available, and the interest rate is often much higher.
Added to this, the savings won’t receive any interest.
“This was not as much of a problem when interest rates were at historic lows but there is significant opportunity cost now and that is before you consider potential investment returns missed out on,” says Holloway.
Tenants in common
“Tenants in common is typically a legal arrangement made between two buyers at the conveyancing stage, rather than a specific mortgage,” says Gilbert.
“It acknowledges that each party has contributed a certain amount to the deposit in a legal document, so future equity will be distributed equally.”
Unlike the mortgages mentioned above, this arrangement sees the assister or parent being named on the deeds, as each borrower has a separate share in the property.
“This is very useful where a parent and child plan to live together, and the parents’ funds are to be legally distinct (useful if it’ll be split for other people in a will etc),” says Hemming.
As the funds are separate from each other, “the risk of financial loss to parents is much lower,” he adds.
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While other bonuses include a good choice of mortgage products, there are additional legal costs involved in setting up this type of arrangement. It also means that if one owner wants to sell up and the other doesn’t, it can be problematic.
Gilbert points to different variations of tenants in common. “As the family boost space has developed, there are interesting new propositions coming to market. One of these is 'dynamic homeownership' — a new take on tenants in common.
“This allows families or friends to buy together and track their contributions so the equity in the home is eventually split depending on their initial investment and the amount they contribute on a monthly basis.”
If you decide as a family to go down the Bank of Mum and Dad mortgage route, it’s important to have open discussions about what’s involved and what will happen in a worst-case scenario.
Talk to a mortgage broker early on in the process — these mortgages often involve complex arrangements, and they can help find the best solution for everyone involved.
